The tax law has developed the following jargon in quantifying levels of confidence in reporting return positions, with the percentage being the projected chances for success if litigated:
nonfrivolous = 10 percent or better chance of winning
reasonable basis = 20 to 25 % or better chance of winning
realistic possibility of success = 33 1/3 % or better chance of winning
substantial authority = perhaps 35 to 40 % chance of winning
more likely than not = more than 50 % chance of winning
probable = 70 to 80 % chance of winning
These standards can be stated in the inverse:Some of the most troubling issues the tax lawyer will face is in trying to quantify these confidence levels and make them meaningful to both the client and to the tax lawyer. All tax lawyers have observed very aggressive opinions as to confidence levels which seem to have been designed primarily not as an objective assessment of the confidence level / best guess, but rather to offer some level of audit assurance to the client or, in the case of probable or higher, permit the client to claim the benefits of an aggressive shelter on financial statements. We saw this phenomenon in the tax shelter prosecutions involving individuals associated with major accounting and law firms which had rendered more likely than not tax opinions where, on any objective basis, there was no reasonable chance of prevailing (i.e., the position was more aggressive than frivolous and met the objective standards of violating a knowable and known legal duty).
nonfrivolous = 90% chance of losing
reasonable basis = 75-80% chance of losing
realistic possibility of success = 66 2/3 % chance of losing
substantial authority = perhaps 60 to 65% chance of losing
more likely than not = less than 50 % chance of losing
probable = 20-30 % chance of losing
Monte Jackel, a frequent and thoughtful commentator on the state of the tax law and practice, has an excellent article that deals with this and a related phenomenon. Monte A. Jackel, The Aggressive and the Meek, 137 Tax Notes 77 (Oct. 1, 2012), which may be viewed or downloaded from the Tax Prof Blog, here.
Here is a cut and paste of the introduction (footnote omitted):
A common dilemma in tax practice arises when the client asks the question you know is coming: "At what level of comfort are you on this issue?" Of course, this question concerns whether the practitioner is at a "should," "more likely than not," "substantial authority," or other position on an issue.
These concepts, although phrased in terms of objective standards of analysis, n1 are really quite subjective and lead to a division of camps among tax practitioners: the aggressive camp and the conservative -- or meek -- camp. Those in the aggressive camp will push against that mythical line between what is legitimate taxpayer behavior and what is not. Those in the meek camp shy away from the line on matters that push or even cross the line; they stay well within the bounds of clearly permissible taxpayer behavior for fear of being chastised for stepping over the line.
The problem is that the line between legitimate and improper taxpayer behavior is often fuzzy given the many gray areas in the tax law. Because the issues are not black and white, it is often unclear exactly where the line is. Competitive pressure from peers (from within the same firm or from different firms) who will give the client the desired opinion cannot be discounted as a motivating factor. I believe it is this pushing against the line that creates much of the tension in the practice of tax law today. Is it good or bad to be in one camp or the other, and who judges what is good and what is bad?
Underlying those fundamental questions is another equally important question in tax practice: Is the practitioner under any duty to the tax system to see that it functions in a manner that furthers the interests of taxpayers generally, or is the practitioner's sole role zealous representation and advocacy for the client-taxpayer at all times and at all costs?
This issue comes up most frequently when the tax practitioner appears to take off his "client" cap and participates in written or oral comments to the IRS, Treasury, or congressional staff on pending law or the implementation of regulatory or other type of guidance. Then, the question becomes whether the practitioner should offer up comments without regard to client interests if it is in the best interests of sound tax policy, or whether client interests can or should influence the practitioner's comments to the government, explicitly or implicitly.
I am not talking about situations in which the client retains the practitioner to write comments on its behalf. In those cases, the identity of interest will be apparent to all. Rather, I am talking about instances when, for example, a bar association report is being written and the statement is made that no drafter of the report has been compensated by a client to write the comments. Those reports also state that the standard conflict of interest policy of the organization precludes participation in the drafting of comments if client interest would interfere with the practitioner's independent judgment. Does that mean client interests are not being advanced because of the specific disclaimers in the comments, even though in the real world of economics and client retention, saying something in bar comments that would jeopardize a client's interests could spell trouble for the practitioner with his client or with his employer-firm?
After all, what happens to a practitioner who works on a comments project to the government and advocates a position that would harm his client or his firm's client? In the real world, where the First Amendment does not apply to speech in the workplace that is contrary to the employer's best interests, the answer appears readily apparent: There is and will continue to be enormous pressure on the tax practitioner to see that client interests are advanced, or at least not negatively prejudiced, by the pending guidance.
That said, there are many fine practitioners who will put themselves in the line of fire and speak their minds no matter the consequences. I am sure each of us can think of several practitioners who are known to do this very thing. However, I believe they are the exception and not the rule. We all have to eat after all, right?I recommend you read the whole article. It is short and thought provoking. And, for students taking the course, they might want to re-read it after the examination.
I posted this same blog on my Federal Tax Procedure Blog, here. Those interested in comments might check that blog entry.